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Know the changing rules before investing in Mutual Funds

 

 

MUTUAL funds are constantly on the lookout to ensure that there are some attractive features for investors. This often takes various forms and do not necessarily remain confined to the actual performance of the fund.

At the same time there are several features offered by the funds that are touted as a big benefit to investors which means that it is for the investor to ensure that they look at the situation carefully and then make the decision as to whether this actually represents a benefit for them.

This will require an element of evaluation and work but this is well worth the effort as they are able to determine whether the benefit has actually materialised for them. Here are a couple of such recent steps that need closer scrutiny.


No exit load:

The fact that mutual funds now do not charge an entry load is common knowledge. In fact since there is a clear guideline on this issue there is no way that the mutual fund can actually charge an entry load when an investor is putting money into a fund. This makes the situation similar for all the funds, as there will not be an entry load on all funds and the investor will get the units at the net asset value (NAV) on the date of the investment.

Now that most of the funds have this same kind of exit load, a fund (Bharti Axa MF) has tried to make a difference by removing the exit load from its equity funds. In such a situation, it would mean that an investor can go in and out whenever they wish. This might seem to be a very good thing at first sight but the real question is whether it actually is so. The worry for this kind of move is that there would be several investors who would misuse this facility to make quick entry and exit but this would be at the cost of the other investors present in the fund.


No charges:

While exit load is one expense that might be incurred by an investor, there is another charge that could be present no matter what the time frame is for the investment. The manner of the investment also doesn't affect this expense which is the fund management expenses and are charged every year and adjusted through the NAV, so that the investor does not actually have to pay the amount separately.

Recently there was a new fund offer from a fund house (Reliance MF) where it decided to not charge the expense, as the asset management company would bear the charge. The fund was an index fund and the idea was to ensure that there was a wider spread and coverage of such a fund so there would be no charge that would be levied for the initial period.


There are two things that are related to this piece of detail.


The first is the time period for which there would not be any charge. The fund can impose the charge when it wants to so there will be an initial time period for which the charge would not be present but ultimately there will be a charge because this is the manner in which the fund earns money.

The second thing is also that the nature of the fund has to be considered for the purpose of the evaluation.


This is an index fund where the charges would be lower than an actively managed fund and this point also needs to be kept into consideration. Passive funds normally have fund management charges between 0.75 and 1 per cent. The investor should evaluate whether such expenses actually provide some form of benefit to them or is it just a small item that is being used by the fund for the purpose of attracting investors to its fold.
There is a difference that the investor will face when the fund is an index fund because the savings will be directly and immediately reflected in the net returns.
For example, a fund mirroring the Nifty will have returns similar to the index so the cost reduction will boost the net figure and it will be visible. Against this, an actively managed fund where such a situation might be present would make the impact difficult to be visible, considering the fact that there is a large variance that is witnessed in the performance across funds and against benchmarks.

 


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